Tax-lien priority in cannabis sales

Who gets paid first when a cannabis business with tax liens is sold?

Whoever perfected first, in most cases. Lien priority in the United States runs on a first-in-time rule, and tax liens mostly follow it. A lender that filed its UCC financing statement or recorded its mortgage before the tax agency filed its lien notice is paid first from that collateral. A tax agency that filed first is ahead of later lenders. Unsecured creditors and owners come after every lienholder.

This matters more in cannabis than elsewhere for two reasons. Section 280E produces federal tax bills that can exceed cash profit, so tax liens are common. And because plant-touching companies generally cannot use federal bankruptcy, there is no bankruptcy court to sort the claims. The order is worked out lien by lien, under non-bankruptcy law, by the parties at the closing table or by a state-court receiver.

How the federal tax lien works: IRC 6321 and 6323

Two sections do most of the work.

• Section 6321 creates the lien. When a person liable for a tax does not pay it after demand, the amount, with interest and penalties, becomes a lien on all property and rights to property, real or personal. No filing is needed for the lien to exist. At this stage it is sometimes called a secret lien, because nobody but the IRS and the taxpayer knows about it.
• Section 6323 limits it. The lien is not valid against a purchaser, a holder of a security interest, a mechanic’s lienor, or a judgment lien creditor until the IRS files a Notice of Federal Tax Lien in the office the state designates. For business personal property that is tied to the taxpayer’s residence or principal office, not the location of the equipment.

Section 6323 also protects some interests even after the notice is filed. The ones that come up in cannabis deals:

Protected interest	Rule in 6323	Deal relevance
Retail buyers in the ordinary course	6323(b)	Customers take product free of the lien; inventory sold before closing is not clawed back
Real property tax and special assessment liens	6323(b)	County property taxes on the building are paid ahead of the IRS
Lender advances made within 45 days after the notice is filed, under a written agreement signed before filing	6323(c) and (d)	A revolving or inventory lender keeps priority for a short window, then loses it for new advances made with knowledge
Attorney’s liens on a judgment or settlement	6323(b)	Rarely relevant to a sale

A filed notice lasts for the collection period and must be refiled in the one-year window ending 30 days after 10 years from assessment, or it lapses against third parties.

How state tax liens rank

State liens are created by state statute, and the rules differ. California is a useful example because its cannabis excise and sales taxes are administered under similar collection rules.

• An unpaid sales or use tax becomes a perfected state tax lien on all the taxpayer’s property and rights to property in California. It lasts 10 years unless a notice is recorded or filed to extend it.
• When a taxpayer is insolvent, makes a voluntary assignment of assets, or is in a similar collective proceeding, the tax is to be paid first. But the same section says the state has no preference over a lien or security interest recorded or perfected before the state records or files its own lien, and that the tax priority sits behind the statutory preference for certain wage claims.

So California follows the same logic as the federal rule: an earlier perfected lender beats the state, and the state beats later lienholders and unsecured creditors.

State against federal is also first in time. A state tax lien generally has to be specific and perfected, with the amount fixed, before the federal notice is filed to rank ahead of it. Closing attorneys settle this from the dated lien search, not from general principles.

Separately from lien priority, states such as California and Michigan make the buyer personally liable for the seller’s unpaid taxes unless it withholds or obtains a clearance. That is successor liability, not priority, and it is covered on tax liabilities and holdbacks in a sale.

An illustrative closing waterfall

Illustrative only. A cultivation business sells its assets for $2,000,000. The dated lien search shows:

Rank	Claim	Date perfected or filed	Amount owed	Paid from price
1	Costs of sale and escrow	n/a	$120,000	$120,000
2	Private lender, first lien on all assets	March 2023	$1,100,000	$1,100,000
3	State tax lien	June 2024	$250,000	$250,000
4	IRS Notice of Federal Tax Lien	January 2025	$700,000	$530,000
5	Equipment vendor judgment lien	August 2025	$90,000	$0
6	Owners	n/a	n/a	$0

Arithmetic: $2,000,000 less $120,000, $1,100,000, and $250,000 leaves $530,000 for the IRS, which is $170,000 short. The sale can still close. The IRS can discharge the sold assets under section 6325(b)(2)(A) on payment of the value of its interest, here the $530,000. The judgment creditor, with nothing to collect, is asked to release. The seller still owes the IRS $170,000 after closing.

If the lender had perfected in February 2025 instead, the IRS would rank ahead of it and the lender would take the shortfall. Dates decide everything.

Release, discharge, and subordination at closing

A buyer’s title insurer or counsel will not close over a filed tax lien. Three federal tools clear it, all in section 6325:

1. Release. On full payment the IRS must issue a certificate of release within 30 days. The escrow agent wires the payoff from the proceeds.
2. Discharge of specific property. The lien stays on the taxpayer but comes off the assets sold. Grounds include payment of the value of the government’s interest, a finding that the interest has no value because senior liens exceed the price, and an agreement that the proceeds stand in place of the property while priority is resolved.
3. Subordination. The IRS lets another creditor move ahead, typically where new money will increase what it finally collects. This is how a rescue loan is sometimes put in place ahead of a sale; see financing a distressed acquisition.

State agencies have their own payoff demand and release procedures. Request every payoff early. The seller-side steps are on selling with tax delinquency.

Tax liens in receiverships, foreclosures, and assignments

A sale outside a negotiated closing raises extra federal rules.

• Secured-party and other nonjudicial sales. Under 26 U.S.C. 7425, if an IRS notice was filed more than 30 days before the sale, the sale does not remove a junior federal lien unless the IRS received written notice at least 25 days before it. For real property the government can also redeem within 120 days after the sale, or the state redemption period if longer.
• Court-ordered sales. A judicial sale affects a filed federal lien only if the United States was made a party, which is why receivers name or negotiate with the IRS rather than ignore it. The process is described on cannabis receivership sales explained.
• Personal liability of the person paying. A representative who pays other debts of an insolvent company before a federal claim is liable to the extent of the payment. Receivers, assignees in an assignment for benefit of creditors, and owners running a wind-down all watch this rule.

What buyers and sellers should do

Sellers. Order a lien search on the entity and on yourself if the business is a pass-through. Build a dated schedule of every lien. Ask each agency for a written payoff good through the expected closing date. If the price will not cover everything, start the discharge application as soon as there is a signed letter of intent.

Buyers. Make release or discharge of every tax lien a closing condition, pay agencies directly from escrow, and hold back for unfiled or unaudited periods. Price the deal knowing that the lien ladder, not the seller, decides where your money goes. Pricing method is on valuing a distressed cannabis business.

This page is educational and is not legal or tax advice. Lien priority turns on exact dates and state law, and a tax attorney should confirm the order before anyone is paid.